2007 Home Prices Drop Most Since Great Recession

Home prices in the United States likely fell the most in 2007 since the Great Depression.

While statistics are not formally out yet, the National Association of Realtors (NAR) estimates that existing home prices fell 1.9% in 2007. For new homes, the NAR estimates that prices fell 2.1% last year. My prediction — and what I believe will eventually be released as the official price change — is a deeper price drop for existing and new homes.

I became bearish on U.S. housing prices back in 2005. In my forecast for housing prices for 2007 (see PROFIT CONFIDENTIAL 12/20/06), I said “.your house will be worth less in 2007 than it was in 2006 or 2005.” I believe I’m not far off with that forecast.

While NAR is predicting that 2008 will be a better year for housing than 2007, I beg to differ. I see housing prices getting hit hard again in 2008 because of consumer uncertainty over the economy and the difficulty consumers will have in financing their home purchases in 2008.

In my opinion, the Dow Jones U.S. Home Construction Index says it all. According to the price chart of this index, comprising some of the largest homebuilders in the world, housing prices are headed to their lowest level since 2003. Too many houses built during the boom (too much inventory) and not enough demand create a torturous environment for the American housing market. The Dow Jones U.S. Home Construction Index, which I follow avidly, topped out in mid-2005.

My prediction is that 2008 will witness the bankruptcy of at least one major new U.S. homebuilder. This will make consumers even more cautious about buying a house in 2008 — adding to downward price pressure.

As for the NAR, they represent real estate agents and brokers who make a living selling homes. In November 2006, the NAR ran a pathetic full page ad in all the major American newspapers that said, “Right now may actually be one of the best times to buy a home.” Am I happy I didn’t listen!